Zachariadis v Allforks Australia Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

No 3715 of 2008

NESTOR ZACHARIADIS

Appellant

ALLFORKS AUSTRALIA PTY LTD

(ACN 464 241 040)

Respondent

---

JUDGES	BUCHANAN and NEAVE JJA and KYROU AJA
WHERE HELD	MELBOURNE
DATE OF HEARING	4 June 2009
DATE OF JUDGMENT	13 November 2009
MEDIUM NEUTRAL CITATION	[2009] VSCA 258
JUDGMENT APPEALED FROM	Allforks Australia Pty Ltd v Zachariadis (Unreported, County Court of Victoria, Judge Kennedy, 13 December 2007)

---

CONTRACT – Penalties – Applicable test in deciding whether liquidated damages clauses in hire purchase agreements were penalties – Whether test applied correctly – Absence of formula calculating net loss, lack of difficulty in estimating net loss, lack of relationship between pre-estimates of damages caused by breach and amounts payable indicated that the clauses were penalties.

GUARANTEE AND SURETY – Liability – Guarantor secured obligations under hire purchase agreements – Whether guarantor aware of term of hire purchase agreements and annexure – Whether annexure to agreements affected guarantor’s liability – Whether obligation existed to bring annexure to guarantor’s attention.

---

Appearances:	Counsel	Solicitors
For the Appellant	Mr G J Parncutt	Sevdalis Lawyers
For the Respondent	Mr J D Catlin	Harwood Andrews

BUCHANAN JA:

I agree with Neave JA that the appeal should be allowed for the reasons stated by her Honour, that the judgment below should be set aside and judgment entered in favour of the appellant.

NEAVE JA:

The appellant, Mr Nestor Zachariadis, seeks to set aside orders of a County Court judge requiring him to pay the respondent, Allforks Australia Pty Ltd (‘Allforks’), the amount of $117,691.08, arising under guarantees which he executed on 24 January 2006. The guarantees related to the performance of obligations undertaken by Priority Road Express Pty Ltd (‘PRE’) under four agreements for the hire of forklifts made between it and Allforks.

It was not disputed that Mr Zachariadis, a Director of PRE, signed the four hire agreements and the guarantees associated with the hire agreements. However, in the proceedings below, Mr Zachariadis claimed that when he did so, he was unaware that the hire period for the forklifts was 60 months, or that the guarantees covered that period. He also argued that the clauses in the hire agreements, which required the hirer to pay all charges which would have been payable from the date of termination to the expiry date of the agreements, if the agreements were terminated within the hire period, were void as penalties.

Two main questions arise on the appeal. The first question is whether her Honour wrongly found that Mr Zachariadis knew that the hire agreements provided for a 60 month hire period and that the guarantees executed by him covered that period. The second question is whether the clauses in the four hire agreements, providing for payment of future hire charges in the event of termination, were provisions requiring payment of liquidated damages, or penalties.

The hire agreements, guarantees and annexure

The hire agreements were pro forma documents with spaces for insertion of relevant details on the front, and terms and conditions set out on the back. Allforks tendered a pad of uncompleted pro forma hire agreements, each of which had a white front copy attached by adhesive at the top of the form to a yellow carbon copy.

The evidence of Mr Travis Kemp, a sales representative for Allforks at the time when PRE hired the forklifts, was that after the hire agreements were signed the white copy was given to the customer and Allforks kept the yellow copies. The yellow copies of the hire agreements entered into by PRE were tendered by Allforks, but the white originals could not be found by the liquidator of PRE and were not produced in response to a subpoena.

At the top of the front page of the hire agreements the following was printed:

ALLFORKS AUSTRALIA (AFA) agrees to hire to the person whose name and address are set out in the Schedule (‘the Hirer’) all those goods described in the Schedule as the Equipment for the period and for the hire charges appearing in the [S]chedule on the terms and conditions set out overleaf in consideration of AFA agreeing to hire the Equipment.

The schedule appeared immediately below the above paragraph and included space for insertion of various details, including the name and address of the hirer, details of the equipment hired, the hire charges payable, the guaranteed hire period and the commencement and expiry date of the agreement.

There was then a clause which read:

The Hirer agrees to hire the equipment from AFA and agrees to be bound by the terms and conditions following …

A provision for signature by a person for and on behalf of ‘the Hirer’ (i.e. PRE) and for and on behalf of Allforks followed.

In the yellow copies of the four agreements tendered by Allforks, the details had been completed in handwriting. These included the amount of the hire charge and a commencement date of 24 January 2006. There was no handwriting in the space labelled expiry date. In each of the copies, the handwritten ‘guaranteed hire period’ was set out as ‘60 Months (36 months with 24 month option) – SEE ATTACHED’. The hire agreements were signed by Mr Travis Kemp ‘for and on behalf of AFA’ and by Mr Zachariadis ‘for and on behalf of the hirer’. The former signature was dated 23 January 2006 and the latter 24 January 2006.

The guarantee was on the same page as the schedule. The handwritten name and address of the guarantor was ‘Nestor Zachariadis, 12 Apple Blossom Court, Templestowe, Vic’. Then followed a provision under which the guarantor:

… guarantees to AFA the due and punctual payment by the Hirer of the Hire Charges and all other sums due under this Hire Agreement and the due observance and performance of the terms and conditions of this Hire Agreement.

The guarantor’s signature (also agreed to be that of Mr Zachariadis) was dated 24 January 2006. Mr Murray Mountjoy, the Managing Director of Allforks, signed the guarantee in his capacity as Director on the same date. As I have said, the white pro forma documents had terms and conditions of hire on the back, as did the yellow copies. The relevant terms and conditions are at [77] below.

The original document said to have been an annexure to the hire agreements and guarantee was produced by Allforks. Only one copy of the annexure was produced and not four separate copies (ie one for each agreement). It read as follows:

Terms of Contract (Hire Period)
The attached contract numbers, (1757, 1758, 1759 and 1760) are for the term of 60 months. If at 36 months Priority Road Express Pty Ltd has no further requirements for forklifts Allforks Australia Pty Ltd will accept the return of the forklifts at no penalty providing the following requirements are met.
1. 30 Days notice
2.The forklifts can not be replaced with a competitors [sic] forklift for the remaining 24 month period of the contract.

The clause above was followed by a signature of Mr Kemp, described as Sales Consultant for Allforks, and an indecipherable signature over the description ‘Director – Prioirty [sic] Road Express P/L’. Written beside that signature were the words ‘Michael Damianos 24/01/06’. Mr Damianos had previously been a director of PRE and the General Manager, but was no longer a Director when the hire agreements and guarantees were signed. He maintained he had not signed the annexure.

Mr Zachariadis claimed that he had not been aware of the terms and conditions on the back of the hire agreements and that the ‘guaranteed hire period’ in the schedules were blank at the time of signing, but had later been changed to include the words ‘60 Months (36 months with 24 month option) – SEE ATTACHED’. He said that he had never seen or signed the alleged annexure. He also said that the name and address of the guarantor, handwritten in the space on the guarantees, were not written in his handwriting. In the proceedings below, Mr Zachariadis’ counsel did not pursue any issue arising from the insertion of the name and address of the guarantor. Instead, ‘this matter was said to go to the issue of the efficacy of the execution process generally’.[1]
[1]Allforks Australia Pty Ltd v Zachariadis (Unreported, County Court of Victoria, Judge Kennedy, 13 December 2007) (‘Reasons’), [23].

The Evidence

The plaintiff called Mr Kemp, who had worked for Allforks in January 2006 as a sales representative, under the supervision of Mr Darin Compt, the National Sales Manager for Allforks, and Mr Mountjoy, who had the direct supervision of Mr Compt. Mr Zachariadis gave evidence and Mr Damianos, who was involved in the negotiations with Allforks, was also called to give evidence on Mr Zachariadis’ behalf.

Mr Travis Kemp

Mr Kemp was responsible for securing and negotiating rental contracts for Allforks. He was trained and supervised by Mr Compt. The training included learning how to fill out hire agreements and ensuring that they were complete.

Mr Kemp gave evidence as to the process of generating a quote. He said that after dealing with a customer, he generated specifications for a quote in the company system and a letter was then sent to the customer. He said that he had written to PRE forwarding quotes on 12 December 2005 and 14 December 2005 to Mr Brett Fleming, the Warehouse Manager at PRE, with whom he had previously discussed PRE’s requirements.

The letters and attached quotes were exhibited. There were two quotes attached to the 12 December 2005 letter, the second of which anticipated that there would be some further attachments to the forklifts. Each quote set out monthly and weekly rental rates, and noted ‘[a]ll figures based on a 60 month contract.’ The two quotes attached to the 14 December 2005 letter contained a lower monthly and weekly rate than the quotes attached to the earlier letter and contained the same provision relating to the 60 month contract. The name Michael Damianos was handwritten against the printed clause in the 14 December 2005 quote which read ‘[w]e hereby agree to the above terms and conditions’.

Mr Kemp said that forklifts were normally hired for three to five years with the latter term being common. A term of 36 months was not as common. The price for hire was higher for short term than for long term contracts.

Mr Kemp said that he had met with Mr Damianos, who was reluctant to agree to a 60 month period and that was why the 36 month hire period was inserted in the hire agreements. He said that the handwriting on the hire agreements filling in the details was ‘all mine’ and that he had filled in the agreements before going to the meeting with PRE on 24 January 2006, accompanied by Mr Compt.

He was asked what had happened at the meeting and said:

We walked in upstairs. We sat in front of Michael Damianos, who I met previously. We asked for the guarantor’s signature on the rental contract. He informed us that he couldn’t do that, based on the authority he had within the company. Nestor was asked to sign them. He – Michael called him over. He grabbed the rental contracts. He went back to his office and returned about 10 minutes later with the guarantors [sic] signature on the rental agreements, and not long after, Darin and I left the premises.

Mr Kemp denied that he would have filled in the term in the agreements relating to the guaranteed hire period after they were signed by Mr Zachariadis. He said he had never used an annexure for any other agreement.

In cross-examination he said that he had expected Mr Damianos to sign the agreements when he took them to the premises. He recalled Mr Zachariadis being called into the room and taking away the agreements to sign. He said that it was standard practice to take the hirer through the agreement, though he did not recall actually doing so. He did not specifically recall whether he had the annexure with him and whether Mr Zachariadis took it away with him when he took the other documents away to sign. He said he had written Mr Damianos’ name on the attachment, but did not recall the circumstances in which he had done so.

Mr Darin Compt

Mr Compt said he had been trained by a previous employer to complete agreements and had been taught to explain the contract to the customer and the reason why a guarantee was needed. He had also received training at Allforks from Mr Mountjoy, who had told him about the importance of filling out the paperwork correctly and explaining it to the customer.

Mr Compt said that the common rental period for forklifts was a term of 60 months and that the next most common period was three or four years (i.e. 36 or 48 months). He said that the company would try to avoid 36 month hire terms because the rental rate for this shorter period was high. He said that he had a supervisory role in relation to quotes and he looked at every quote before it went out. He said he had looked at the quotes in relation to PRE. He said that Mr Mountjoy would advise when a guarantee was required and that it was generally company policy to require a guarantee in the case of a transport company because Allforks had not had ‘the best run with transport companies’.

He said that he had accompanied Mr Kemp to the PRE meeting because:

… Travis hadn’t ever had to deliver the news to a client that we needed a guarantor section filled out. Felt a bit intimidated, I guess, about how do you deliver this in a professional way. Having had experience in doing this with Yale [Mr Compt’s previous employer] as well, I [saw] it as part of the training exercise to be there with the sales representative to explain why it needs to be filled out.

He said he had looked at the agreements and had seen the annexure before they went to PRE’s premises, but that he could not be 100 percent sure that it was present when they went on site.

When they had gone to PRE’s premises, they had been introduced to Mr Damianos and had a discussion about the needs of PRE. His evidence about the 60 month term was as follows:

So was the term of the hire discussed at all? - - - Yes.
Can you recall from your memory what the term of these agreements was? - - - Yes, they were 60 month agreements – they were 36 month agreements – if I can just retract that. It was - - -
Don’t look at the document? - - - Sorry. It was based on the annexure A, we gave them 60 month rates on a 36 month agreement that stated if they exceeded – at 36 months they could hand the forklifts back if they weren’t required, and weren’t going to be replaced with a competitor product. One of the sticking points of the deal for Travis was that they liked the 60 months rate, but were concerned that when their contracts expired that they wouldn’t be in business any more, or there was a possibility that they would shut down. This is not abnormal. We have done this a couple of times.
So, was that discussed while you were discussing business – the difficulty with a 60 month terms, or the discomfort with a 60 month term? - - - I’m not a hundred per cent sure. There was no question about the term. It didn’t form part of the meeting.

He said that they had been told by Mr Damianos that he would not sign the documents and Mr Damianos went and got Mr Zachariadis to come out and see them. He said that he had taken Mr Zachariadis through the documents. He was asked what he meant by that and said:

As I do in every rental signing, I walk the client through the information filled out on the hire agreement, just in case there’s something incorrect and/or, you know, they might pick you up on something. And then I show the overleaf terms and conditions, I don’t read through them, I point out where they are.

Mr Zachariadis had then said he was going away to read the documents. He had gone off to sign them, and came back approximately five to ten minutes later with the documents completed. Mr Compt then read them through to make sure every section was complete and that signatures were in the correct position. When asked whether the guaranteed hire period was blank when Mr Zachariadis took the documents away, he said:

That would be highly abnormal. I’ve not seen where the documents aren’t filled out correctly.

In cross-examination Mr Compt said that he had expected Mr Zachariadis to sign the documents when he went to the meeting. He said he was aware there was an annexure to the guarantee, although he could not ‘100 per cent recall whether it was there or not’. He was asked by counsel for Mr Zachariadis whether he would have a guarantor sign an annexure sheet so as to confirm the guarantor was aware of the amendment and he said that was not his protocol. When asked again whether he would ask a guarantor to sign the annexure sheet he said that:

I would think [we] would quite often do that … We would try to get it done, I would imagine, at the same time.

Mr Compt said he had a recollection of explaining the documents to Mr Zachariadis and that he had explained to him that he was signing the documents as a guarantor. He was asked if the address of the guarantor was filled in on the forms when they were handed to Mr Zachariadis. He said that he did not remember but normally the guarantor filled out the address on their own behalf. He said that the handwriting was not his or Mr Kemp’s and he did not know whose handwriting it was. He also said that:

… the contract wouldn’t have gone out without the guaranteed hire period on it, as it never does, because it would make it impossible to explain the contract professionally, and for the client to understand what term he’s entering into.

Mr Murray Mountjoy

Mr Mountjoy is the Managing Director of Allforks. He was not present at the meeting attended by Mr Kemp and Mr Compt, but gave evidence that he supervised Mr Compt, trained him about procedures and spoke to him once or twice a day. He said that the normal term of rental hire was five years and that the rental cost for such an agreement would be about 30 per cent cheaper than for casual contracts. The rental price of $176.72 per week paid by PRE was ‘definitely a competitive price’ and one that was based on a 60 month term for that kind of forklift.

He said that the sales representatives required his approval to hire equipment to a transport industry customer without a guarantee. He had met with Mr Compt and Mr Kemp to talk through the contracts and to ensure ‘that the guarantees were going to be completed fully and properly’.

Mr Mountjoy also gave evidence as to the damages suffered by Allforks arising from the premature termination of the hire agreements. I refer to that evidence at [82] below.

Mr Michael Damianos

Mr Damianos said that in his negotiations with a representative of Allforks the hire was ‘a month to month proposition’. He said the representative of Allforks had come into the office with the documents and he had said he could not sign them and would have to get Mr Zachariadis. He could not recall if one or two men were present. He told Mr Zachariadis the price they had previously been paying to another hire firm and there was no conversation at all about anything, and Mr Zachariadis signed the documents immediately. He did not recall the annexure and it was not his signature on it.

In cross-examination he said that at the time of the hire, Allforks’ hire prices did not vary according to the term of the hire agreement. He said that Mr Fleming was involved in the earlier negotiations with Allforks and that he had not seen the letters attaching quotes from Allforks to Mr Fleming.

He said that in his conversation with Mr Fleming and with the representatives of Allforks, there had never been any conversation about the price varying according to the duration of the agreement. He could recall the laying out of the separate documents on the desk and their signing, but did not remember the annexure.

Mr Damianos admitted he was disqualified from being a Director of PRE because he had previously been convicted of offences arising out of false accounting during his earlier directorship of another company.

Mr Nestor Zachariadis

Mr Zachariadis’ evidence was that he was not involved in any negotiations with Allforks and Mr Damianos had told him nothing about the term of hire.

He said that at the 24 January 2006 meeting he discussed the agreements with two men from Allforks. The agreements set out weekly rates to be paid monthly. There was no reference to a guaranteed hire period of 60 months with another option in the document and there was no name and address of the guarantor on the documents when he signed them. No documents other than the hire agreements had been handed to him at the time of hiring. Unlike Mr Damianos who said Mr Zachariadis had signed the documents immediately, Mr Zachariadis said he had taken away the documents for signing.

In cross-examination he said he had never discussed with Mr Damianos the term of the agreements and had never seen any quotes. He did not know that Mr Fleming was involved in negotiations with Allforks and had never discussed these negotiations with him. He said he had not been alerted to the terms on the backs of the white forms and had not known they were there and had not seen the reference to terms and conditions overleaf. The white forms were on a brown table and the terms on the back could not be seen. He had a specific memory that the guaranteed hire period was not filled in. It was not his signature on the annexure.

In re-examination he said he had had memory training in the SAS. He also said he would not have agreed to enter hire agreements on behalf of PRE specifying a term of 60 months.

Her Honour’s findings

The trial judge considered that Mr Compt was an ‘impressive witness’.[2] She observed that although Mr Zachariadis had said he had a very good memory, he was ‘vague on some details including the names of the Allforks people present [at the meeting] and whether he really looked behind the white document to see whether there were terms on the other side’.[3]
[2]Reasons, [34].
[3]Ibid [45].

Her Honour said that it became clear that Mr Zachariadis only recalled some details by refreshing his memory from the documentation. She said that having observed Mr Zachariadis in the witness box, she did not find his evidence reliable and that there were aspects of his testimony that were not credible.

Her Honour said that Mr Damianos was an unimpressive witness and ‘highly emotional’.[4] She said that he ‘lacked coherency and was clearly uncomfortable in the witness box’.[5]
[4]Ibid [50].
[5]Ibid [50].

Her Honour found that notice was given to Mr Zachariadis of the detailed terms on the back of the white hire agreements by inclusion of the phrases ‘terms and conditions set out overleaf’ at the top of the form and the reference to ‘the terms and conditions following’ immediately prior to the execution section. She rejected the submission on behalf of Mr Zachariadis that the existence of more detailed terms overleaf would not have been obvious by inspection of the white documents and found that the existence of the detailed terms was specifically drawn to Mr Zachariadis’ attention and should, in any event, have been obvious to him.

Her Honour also rejected Mr Zachariadis’ claim that the guarantee hire period was not completed in the agreements signed by him, that the term of the hire had not been discussed prior to execution and that he did not know that the hire agreements were for 60 months with a 36 month option. Although her Honour was unable to determine who signed the annexure, she was satisfied that it was included with the documentation at the time of execution by Mr Zachariadis and given to him and ‘”attached” in some way when he signed the guarantees and the hire agreements’.[6] Further, she found that the existence of the annexure was brought to the attention of the defendant by the inclusion of the words ‘SEE ATTACHED’ on the face of the white document.
[6]Ibid [74].

For these reasons her Honour rejected the Mr Zachariadis’ defence and counterclaim that:

·the hire agreements failed for uncertainty, or did not comply with s 126 of the Instruments Act 1958, because they were incomplete at the time they were signed;
·the hire agreements were void because of a material non-disclosure; and
·the guarantees had been vitiated by the insertion of a 60 month hire period after they had been executed and by the addition of an annexure which he had not seen.

For reasons which I explain in more detail under ground of appeal 5 below, her Honour also held that the clause requiring rental payments for the unexpired term of the hire agreement did not impose a penalty.

Grounds of appeal 1 to 4 - was Mr Zachariadis aware of the guaranteed hire period?

Grounds of appeal 1 to 4 are as follows:

1.The learned trial judge erred in finding that prior to signing the Guarantee the term of 60 months’ hire was known to the Defendant or that the Annexure to the guarantee was sighted by the Defendant or by any of the parties on 24 January 2006 by reason of the fact that such finding was not open on the evidence in that –
(b)there was no evidence or any finding on the evidence that any representative of the Plaintiff had negotiated with the Defendant prior to 24 January 2006;
(c)the evidence and finding were that all negotiations were with Mr Damianos only;
(d)there was no evidence led to support the finding that the term of the hire agreement had been discussed with the Defendant prior to signing of the guarantee.

2.There was no evidence or alternatively there was insufficient evidence on a balance of probabilities to support the finding that it was inherently improbable that the defendant had not made himself aware of the term of the guarantee.
3.There was no evidence or alternatively there was insufficient evidence to support the finding that Mr Damianos would have been likely to pass on information about discussions concerning the term to the defendant.
4.The learned trial judge failed to attach sufficient weight to her own findings that –
(a)Mr Damianos could not recall the Annexure being attached or forming part of the guarantee at the time of execution;
(b)Mr Kemp could not recall whether the Annexure was included with the Guarantee or otherwise brought to the attention of the defendant, yet the learned trial judge found that it was highly likely that it would have been included in the documents at the time of execution because it was protocol and because Mr Compt was an impressive witness;
(c)The decision was against the weight of evidence in that whilst the Guarantee was signed by the Defendant, the Annexure to the Guarantee was not signed by the Defendant or Mr Damianos but by an unidentified person other than Mr Damianos whose name appeared in print alongside the signature of the Annexure to the Guarantee;
(d)The learned trial judge took irrelevant considerations into account –
(i)by holding that despite none of the plaintiff’s witnesses (or the Defendant’s) could recall seeing the Annexure to the Guarantee at the time of signing of the Guarantee, the learned trial judge assumed that the words see attached were included on the face of the Guarantee at the time of execution; and
(ii)by finding that it was inherently likely that the Annexure was attached to the Guarantee because it was not likely that the Defendant would have signed the hire agreements if there was in fact nothing attached; [and]

(iii)by failing to give any consideration to the words ‘see attached’ and the Annexure being added to the Guarantee at a later date after execution.

Counsel’s submissions

In essence these grounds of appeal claim that her Honour erred in finding that Mr Zachariadis was aware that the term of the hire agreements was 60 months and that he guaranteed performance of PRE’s contractual obligations over that period.

Counsel for Mr Zachariadis submitted that the annexure, which Mr Zachariadis said he had not seen, had the effect of converting a hire on a casual basis to a hire agreement for a fixed period of at least 36 months and purported to make the guarantor liable for that period.

Counsel for Mr Zachariadis submitted that there was no evidence that his client had signed the annexure or that he knew of it when he signed the hire agreements and the guarantees. He relied on the following matters:

·Allforks negotiated the terms of the hire agreements with Mr Damianos and not Mr Zachariadis;
·no witness recalled seeing the annexure at the meeting;
·Mr Compt did not recall whether he had taken the annexure to the meeting on 24 January 2006. Mr Compt’s evidence was that ‘there was no question about the term of the hire period at the meeting’; and
·the annexure was not signed by Mr Zachariadis who said he did not see the annexure until its discovery.

Counsel submitted that because Mr Zachariadis’ case was that the words ‘SEE ATTACHED’ in the hire agreements were added later, her Honour had wrongly relied on their presence to support the conclusion that the annexure had been present when Mr Zachariadis signed the guarantees.

Her Honour had found, on the basis of the evidence of Mr Compt, that Allforks’ practice was that a guarantor would normally sign an annexure. Since Mr Zachariadis had not done so it was against the weight of the evidence for her Honour to conclude that Mr Zachariadis was aware of the terms of the hire period.

Counsel further submitted that her Honour had rejected the evidence of Mr Zachariadis inappropriately, simply because he had been associated with Mr Damianos who had been convicted of criminal offences committed in his previous role as a director of another company.

Counsel for Allforks submitted that it was open to the judge on the whole of the evidence to find that Mr Zachariadis was aware of the 60 month hire period before signing the guarantee.

He also submitted that her Honour was entitled to infer that Mr Zachariadis was aware of the hire term because he was in communication with Mr Damianos and was not prevented from discussing the matter with Mr Fleming. It was also likely that the length of the term had been discussed because of the evidence of Mr Mountjoy that the difference in price between a short and long term hire was 25 to 30 per cent.

Counsel for Allforks submitted that her Honour had not rejected the evidence of Mr Zachariadis solely because it was tainted by Mr Damianos’ lack of credibility and that her Honour had given detailed reasons as to why she preferred the evidence given on behalf of Allforks to the evidence of Mr Zachariadis.

Further, much of Mr Zachariadis’ evidence was implausible, including his denial that the terms on the back of the contract could be seen through the surface of the paper and the alleged absence of the hire term in the agreements when other figures were precisely stated in those agreements. Accordingly he submitted that this Court should not reject her Honour’s findings as to Mr Zachariadis’ lack of credibility, and there was no basis for setting aside her Honour’s findings of fact.

Conclusion on grounds of appeal 1 to 4

In my opinion grounds of appeal 1 to 4 are not made out. There was direct evidence which supported her Honour’s conclusion that Mr Zachariadis was aware of the 60 month term of the hire agreements when he signed the guarantees. This included:

·    the reference to 60 months on the face of the hire agreements signed by Mr Zachariadis, immediately above the guarantees which he also signed;
·    the consistency between a 60 month hire term and the reference to the same term in the four quotes sent to Mr Fleming;
·    the consequent improbability that Allforks would have altered the terms of the hire agreements after the guarantees were signed by Mr Zachariadis;
·    Mr Compt’s evidence that he had discussed the key terms of the agreements with Mr Zachariadis;
·    Mr Kemp’s evidence he had filled in the agreements before taking them to the meeting at PRE on 24 January; and
·    Mr Compt’s evidence that he had seen the agreements filled in before attending the meeting.

There was also substantial additional evidence which supported the inference drawn by her Honour that Mr Zachariadis knew he was guaranteeing PRE’s obligations under hire agreements which contained 60 month terms. That evidence included:

·    Mr Mountjoy’s evidence that hiring costs were lower for 60 month contracts than for contracts including shorter hire terms;
·    the likelihood that Mr Zachariadis, a half owner of the business with Mr Damianos’ wife, would have made himself aware of the comparable costs of short-term and long-term hire; and
·    the likelihood that Mr Zachariadis would have discussed the hire term with Mr Damianos, who worked in the next door office, and with Mr Fleming.

Her Honour’s factual findings were based to a large extent on her assessment of the credibility of various witnesses and must accordingly be given significant weight.[7] Contrary to the submission of counsel for Mr Zachariadis, her Honour’s adverse findings as to Mr Zachariadis’ credibility were not based solely on the fact that he had employed Mr Damianos. Her Honour made specific reference to other aspects of Mr Zachariadis’ evidence. In particular, she referred to his attempts to substantiate his claim that he had been unaware that the agreements had terms and conditions on the back, when these were obviously visible when the white document was placed face up. Mr Zachariadis also claimed that he specifically remembered that the guarantee hire period was not filled in, yet was unable to remember a number of other details about the meeting, including who represented Allforks at that meeting.
[7]Fox v Percy (2003) 214 CLR 118.

This is not a case in which there are ‘incontrovertible facts or uncontested testimony’ demonstrating that her Honour’s findings were erroneous.[8] Nor was her decision on the facts ‘glaringly improbable’ or ‘contrary to compelling inferences’.[9] In these circumstances there is no basis for setting her factual findings aside.
[8]Ibid 128 (Gleeson CJ, Gummow and Kirby JJ).
[9]CSR Ltd v Della Maddalena (2006) 224 ALR 1, 8 (Kirby J).

I take the same view of her Honour’s finding that Mr Zachariadis was aware of the annexure at the time he signed the guarantees. Although none of the witnesses could specifically recall the annexure being present, its contents were consistent with the negotiations for reduction of the term of hire between PRE and Allforks. Further, Mr Compt testified that he had explained the terms of the agreements and the guarantees to Mr Zachariadis and said that he would not invariably have a guarantor sign an annexure sheet.

Even if I am wrong in that view, the claim that Mr Zachariadis did not know of the annexure is, in a sense, a red herring. If Mr Zachariadis was aware of the guarantee hire period, because it was handwritten in the relevant space in the hire agreements, I consider that he was liable as guarantor, regardless of the provisions of the annexure. My reasons for this view are explained under my discussion of Allforks’ notice of contention.

The notice of contention, paras 1 to 6

Allforks filed a notice of contention. The matters which related to grounds of appeal 1 to 4 are as follows:

1.The term in the hire agreement providing an option of 60 or 36 months was sufficiently clear on its face or in the company of the contemporaneous oral explanations adduced in evidence such that the only additional term added by the annexure was the 24 month restraint on the use of competitor products in the event of an early termination at 36 months and accordingly the Hire/Guarantee agreement was enforceable in the event that the annexure was held not to be part of said agreement.
2.In the event that the annexure was not part of the Hire/Guarantee agreement its operation was not affected by s 126 Instruments Act 1958.
3.The 24 month restraint clause was an unenforceable restraint of trade and severable from the Hire/Guarantee agreement.

4. In the event that:
(a)the annexure was not sighted by the Defendant at the time of execution of the guarantee; and,
(b)the only term added to the principal contract by the annexure was the 24 month restraint clause; and,
(c)[t]he restraint clause was unenforceable but also inconsequential, trivial or possessing an entirely speculative or indirect hypothetical impact on the debtors [sic] financial capacity

the restraint clause … is an immaterial or obviously insubstantial variation to the principal agreement or alternately is unprejudicial to the guarantor and could not discharge the guarantee.
5.By reason of the restraint clause being not only void or unenforceable but also inconsequential, trivial or possessing an entirely speculative or indirect hypothetical impact on the debtors [sic] financial capacity then insofar as the annexure is a contractual document it lacks the necessary materiality or unusualness to impose a duty on the Creditor to specifically disclose it or otherwise bring it to the guarantor’s attention.
In the event that the annexure did add the 36 month option to the Hire Agreement it was immaterial or unprejudicial to the guarantor and could not discharge the guarantee.

6. The Appellant failed to adduce any evidence:
(a) of materiality of the restraint clause in the annexure;
(b)the likely affect [sic] of the restraint clause on the Appellants [sic] decision to enter into the guarantee

and accordingly failed to satisfy the Court of those necessary elements of a claim for misleading and deceptive conduct contrary to s 52 of the Trade Practices Act 1994.

Counsel’s submissions

The question whether it was necessary for the terms of the annexure to be specifically drawn to Mr Zachariadis’ attention was raised by Allforks’ notice of contention. The written submissions filed on behalf of Mr Zachariadis and Allforks did not address this issue or the matters raised in the notice of contention.

In support of the notice of contention, counsel for Allforks submitted in oral argument that Mr Zachariadis was bound by the guarantees, regardless of whether he knew of the annexure. In support of that submission he relied on Westpac Banking Corporation v Robinson.[10] Counsel submitted that there was no obligation on Allforks to bring the effect of the annexure to Mr Zachariadis’ attention, because it gave PRE the right to reduce the term of the hire from five years to three years and was for the guarantor’s benefit. The fact that the annexure also provided that the forklifts could not be replaced with a competitor’s forklift for the remaining 24 month period of the contract, was simply part of the option and did not operate to the disadvantage of the guarantor.
[10](1993) 30 NSWLR 668.

In reply to those submissions counsel for Mr Zachariadis contended that Allforks was required to alert Mr Zachariadis to the terms of the annexure, because it altered the terms of the hire agreements.

Conclusion on notice of contention, paras 1 to 6

The claim that the guarantee was unenforceable against Mr Zachariadis, because he was unaware of the annexure, does not withstand scrutiny. To establish that the annexure altered his liability as guarantor, Mr Zachariadis must show, at the least, that it altered the terms of the hire agreements between PRE and Allforks. That cannot be the case if PRE, on whose behalf Mr Zachariadis signed, was unaware of the annexure. It was not argued that PRE knew of the terms of the annexure, although Mr Zachariadis did not. If PRE did not know of the annexure it could not take advantage of it and would not be bound by the requirement not to hire competitors’ products for 24 months (assuming that requirement was otherwise enforceable). The fact that the terms of the annexure were unenforceable would not relieve Mr Zachariadis from his liability under the guarantees in the hire agreements. This analysis suggests that the question whether the term in the annexure should have been brought to his attention is irrelevant.

Even if, however improbably, it were accepted that PRE knew of the annexure and was bound by the variation contained in it, but that Mr Zachariadis did not know of it, I do not consider that Allforks was obliged to bring it to Mr Zachariadis’ attention. In Westpac Banking Corporation v Robinson,[11] the New South Wales Court of Appeal held that a bank did not have an obligation to disclose to a prospective guarantor the fact that the account of the customer for whom the guarantee was to be provided was overdrawn. Clarke JA (with whom Handley JA agreed) said that in a contract of guarantee:

… a duty to disclose would arise only where there existed facts the non-disclosure of which would effectively misrepresent material aspects of the transaction which the guarantor was undertaking to guarantee.[12]

[11](1993) 30 NSWLR 668.

[12]Ibid 688.

Since there is no basis for impugning her Honour’s finding that Mr Zachariadis was aware of the guaranteed hire period of 60 months, I do not consider that Mr Zachariadis was disadvantaged by a provision in the annexure giving PRE an option to reduce the term of the hire period, although that obligation required it to desist from hiring a forklift from a competitor of Allforks during the hire period.

Alternatively it might be said (though this was not Mr Zachariadis’ case) that although he knew that the annexure varied the original agreements (and consequently his liability as guarantor) the ‘new’ contracts of guarantee were unenforceable for lack of compliance with s 126 of the Instruments Act 1958.[13] Again this would not relieve him from liability under the original guarantees, which would continue to operate.[14]
[13]Because he did not sign the annexure. It might however be argued that because reference was made to the annexure in the hire agreements, his signature on these agreements satisfied s 126. See N C Seddon and M P Ellinghaus, Cheshire and Fifoot’s Law of Contract (8th Australian ed, 2002) 760-2.
[14]Ibid 762-3.

The above analysis makes it unnecessary to consider whether the restraint of trade in the annexure was void and if so, whether it could be severed from the agreements, as claimed in the notice of contention.

Ground of appeal 5 - liquidated damages or a penalty?
Background

The relevant terms of the hire agreement were as follows:

2Term
2.1This Hire Agreement shall begin on the Commencement Date and shall terminate on the earlier of:
2.1.1 the Expiry Date; or
2.1.2 that Date upon which the Hirer:
2.1.2.1 commits any breach of this Hire Agreement;
2.1.2.2 commits or suffers any act of bankruptcy;
2.1.2.3(being a company) goes into liquidation or has an administrator or receiver appointed over any part of its undertaking;

2.1.2.4 has execution or distress levied against goods.

2.1.3[t]he date on which Allforks Australia terminates the Hire Agreement in its discretion at any time.

14. Termination
14.1Upon the termination of this Hire Agreement in accordance with Clause 2.1.2, the Hirer shall:
14.1.1promptly return the Equipment to Allforks Australia at its principal place of business;
14.1.2pay to Allforks Australia all Hire Charges that would otherwise have been payable from the date of termination of this Hire Agreement to the Expiry Date.

14.2On the termination of this Hire Agreement for any cause, including the passing of the Expiry Date:
14.2.1if the Hirer does not promptly return the Equipment, Allforks Australia shall have the right to enter into any premises on which it reasonably suspects the Equipment to be and to retake possession of the Equipment; and
14.2.2if Allforks Australia does not retake possession of the Equipment the Hirer shall immediately upon demand by Allforks Australia pay to Allforks Australia the current market value of the Equipment.

15.Costs and interest
15.1In addition to the amounts previously referred to Allforks Australia shall be entitled to charge and the Hirer shall pay:
15.1.1all costs and expenses of or associated with retaking possession of the Equipment;
15.1.2interest at the rate of fourteen percent (14%) per annum or any moneys owing under this Hire Agreement that may be overdue.

16.Guarantee
16.1The Guarantor … in consideration of Allforks Australia having entered into this Hire Agreement:
…
16.1.2must pay on demand any amount which Allforks Australia is entitled to recover from the Hirer under this Hire agreement.

On 12 April 2006 Allforks was notified that a receiver and manager had been appointed to PRE and that the receiver would not exercise any rights in relation to the forklifts. As at that date, PRE was in breach of the hire agreements, having failed to pay Allforks a total of $8,594.35 in hire charges owing under the agreements. Following the appointment of the receiver, each of the agreements was terminated.[15] On about 18 April 2006 Allforks repossessed the forklifts. At a meeting of creditors of PRE held on 8 May 2006 it was resolved that PRE be wound up and a liquidator be appointed.[16]
[15]Allforks did not argue that the clause was not a penalty because the hire agreements were terminated following the appointment of a receiver to PRE rather than because of a breach of the agreements: see Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 (‘Ringrow’), 662; Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd (2008) 257 ALR 292 (‘Interstar’), 321-30 (Allsop P). The High Court granted special leave to appeal against the decision in Interstar on 1 May 2009. It appears from the transcript of the special leave application hearing that this issue is the subject of the appeal: Integral Home Loans Pty Ltd v Interstar Wholesale Finance Pty Ltd [2009] HCA Trans 87.
[16]Reasons, [3]-[4].

Allforks sought liquidated damages under the above clauses totalling $117,961.08, comprising $8,594.35 in outstanding charges under the hire agreements and $109,096.73 in hire charges that would have been payable from the date of termination to the expiry date.

Her Honour’s findings

In the proceedings below, Allforks sought to enforce clause 14.1, but did not make an alternative claim for damages. On the hearing of the appeal, counsel for Allforks conceded that, if ground of appeal 5 were made out, the judgment in favour of Allforks should be set aside and the Court should neither assess damages itself nor remit the matter to the County Court for an assessment.

In considering whether clause 14.1 was a penalty or a provision for payment of liquidated damages, her Honour referred to Ringrow v BP Australia Ltd[17] (‘Ringrow’) and said that:

A sum fixed by a contract is a penalty only if it is ‘extravagant and unconscionable’ in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. Further it is not enough that it should be lacking in proportion. It must be ‘out of all proportion’.[18]

She correctly said that the question whether a sum was a penalty ‘is a question of construction to be judged upon the terms and inherent circumstances of each particular contract, judged as at the time of the making of the contract’,[19] and that the defendant bore the onus of proving that the clause was a penalty.[20]

[17](2005) 224 CLR 656, 662-3.

[18]Reasons, [86].

[19]Ibid [87].

[20]Ibid, [88]. Her Honour cited Robophone Facilities Ltd v Blank [1966] 1 WLR 1428, 1447 (Diplock LJ); Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504, 527.

Her Honour then referred to Mr Mountjoy’s evidence about Allforks’ financing arrangements:

The evidence of Mr Mountjoy in this case was that Allforks purchased forklifts to be utilised for both sale and hire. There were numerous forklifts purchased for sale regardless of any order by PRE in this case. These forklifts were financed by Allforks through a corporate hire purchase facility with the ANZ bank. However, upon repossession and sale, the ANZ facility would be prematurely terminated with the result that Allforks would have the obligation to make a repayment amount (excluding penalties and interest) estimated at $65,046.42 (as at 10.11.07). Given the market value of the forklifts was estimated at only $58,000.00, the result would be that there would be no net gain. Even if the book value of $70,046.00 was taken into account the net gain would be small.
Mr Mountjoy also gave evidence that once a forklift was moved into the rental fleet it was treated differently and remained therein which was the case with the 4 forklifts in this case. Upon repossession, attempts would be made to rehire the forklifts and the forklifts would be likely to earn some short term rental income in the future (in fact, Mr Parncutt [counsel for PRE] highlighted that there was evidence that some short term rentals had been collected in this case). However, Mr Mountjoy maintained that Allforks had sufficient forklifts in the rental fleet and so the addition of the four (4) were surplus to Allforks’ requirements since any income earned would have been earned in any event.[21]

This evidence was not challenged by Mr Zachariadis.

[21]Reasons, [89]-[90].

Her Honour said that at first glance the provision for payment of rent for the unexpired term of the hire agreements, without accounting for any value of the re-possessed forklifts, appeared ‘extravagant’. However, in the circumstances she was not satisfied that the clause was a penalty. She noted that Allforks obtained the forklifts on hire purchase and said that:

… the inherent circumstances did not suggest that there would in fact be any windfall gain in repossessing the forklifts. Rather, the evidence suggested that the forklifts would have little if any value to Allforks when the repayment obligation was taken into account.[22]

[22]Reasons, [93].

In this passage her Honour compared the amount which could be recovered under clause 14.1 with the actual loss said to have been suffered by Allforks at the date of breach. I return to that issue below.

Her Honour continued as follows:

The circumstances surrounding Allforks’ hire purchase arrangements, also distinguish the case from the facts pertaining in O’Dea[23] and AMEV.[24] In both those cases the hirer stood to gain a windfall given the goods repossessed had some positive worth. In neither case was the hirer’s ownership subject to another sub-finance agreement.
It may be suggested that the formula in this case is also penal since it makes no allowance for a rebate for the accelerated payment of the future instalments. However, in the absence of any suggestion by the defendant as to what value this might be, I am not satisfied that it would be ‘unconscionable’ or ‘extravagant’.
Finally, Mr Parncutt placed some reliance on the fact that the forklifts might earn some income. However, in the light of the evidence of Mr Mountjoy that Allforks did not need the forklifts to meet its casual hire requirements, the defendant has not demonstrated that any rental income would be in excess to that which would have been earned in any event.
Overall, I am not satisfied that the stipulated sum was out of all proportion or extravagant or unconscionable in the circumstances of this case.[25]
[23]O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 (‘O’Dea’).
[24]AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 (‘AMEV’).
[25]Reasons, [94]-[97].

The ground of appeal

Ground of appeal 5 was as follows:

The learned trial judge erred in giving judgment for payment of the whole of the unpaid balance of the total rent, without discount, because the recovery of the entire rent was not performance of the principal obligation under the hire agreement but enforcement of a collateral disadvantage entailing imposition

of a penalty and thus repugnant to equity having regard to the fact that the evidence was that -
(a)the loss claimed by the plaintiff did not include offsetting future income for the ensuing 3 years;
(b)there would be a windfall gain in the amount of revenue derived from the hiring out of the forklifts over the ensuing 3 years.

The relevant section of Allforks’ notice of contention relating to the penalty issue is as follows:

In calculating the loss or gain from payment of the sum fixed by the agreement the Court miscalculated the net position by failing to properly account for the various cost and income items in the table exhibited and thereby found a possible net gain by the Plaintiff. Properly calculated the net position for the Respondent was a substantial loss by reason of payment of future principle [sic] and interest on the hire purchase financing of the acquisition of the forklifts.

Submissions of counsel for Mr Zachariadis

Counsel for Mr Zachariadis submitted that her Honour wrongly took the view that clause 14.1 was only a penalty if the amount required to be paid was ‘extravagant and unconscionable’ or ‘out of all proportion’ to the greatest loss that might follow from the breach (‘the out of all proportion test’). Counsel submitted that the out of all proportion test was confined to circumstances of the kind arising in Ringrow, where the issue was whether a provision conferring an option to purchase property on breach of contract was a penalty. This was not the approach which courts had previously applied in assessing whether clauses in hire purchase or chattel hire leases requiring payment of a monetary sum were penalties. He also submitted that the emphasis in Ringrow on the parties’ freedom to negotiate the terms of the contract was irrelevant in this case, where the hire agreements were pro forma contracts.

Counsel submitted that clause 14.1 of the agreements created a penalty, because it provided for an amount to be paid on termination of the agreements which was not a genuine pre-estimate of loss. The amount payable under the clause might have no relationship to the actual loss suffered by Allforks.

Counsel submitted that clauses of this kind had been held to be penalties in cases dealing with breaches of chattel hire and hire purchase agreements. In that context counsel relied on the statement of Brennan J in O'Dea[26] that:

… a stipulation which provides for the forfeiture on breach by the buyer or hirer of both the price and the consideration for which it is payable is in the nature of a penalty and equity will relieve against it. The foundation of the jurisdiction to relieve against forfeiture is that the stipulation for the forfeiture is really in the name of a penalty.[27]

[26](1983) 152 CLR 359.

[27]Ibid 391 (citations omitted).

Counsel submitted that courts had applied a test of ‘substantial accuracy’ in determining whether clauses for payment of damages in chattel hire and hire purchase agreements imposed a penalty, or were a genuine pre-estimate of loss.

Counsel for Mr Zachariadis further submitted that in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd,[28] Lord Dunedin said that the question whether a sum stipulated to be paid under a contract was in the nature of a penalty or liquidated damages was to be determined at the time of entry into the contract and not at the time of breach. Although her Honour had referred to this principle, she had wrongly taken account of circumstances occurring after the contract was terminated, including whether repossession of the vehicles had in fact given rise to a windfall gain, and whether the vehicles were in fact surplus to the needs of Allforks. These matters were irrelevant in deciding whether clause 14.1 provided for a genuine pre-estimate of damages, or imposed a penalty.
[28][1915] AC 79, 86-7 (‘Dunlop’).

Counsel conceded that in deciding whether a clause provided for ‘a genuine pre-estimate of damages’ her Honour was entitled to take account of the circumstances existing at the time the contract was made but submitted that the relevant circumstances must be known to both parties at that time. Since there was no evidence that Mr Zachariadis had been aware of the corporate finance arrangements made by Allforks, her Honour should not have taken account of these arrangements.

Submissions of counsel for Allforks

Counsel for Allforks submitted that her Honour had correctly determined whether the clause was a penalty by applying the approach in Ringrow and asking herself whether the clause required payment of an amount which was ‘extravagant and unconscionable’ or ‘out of all proportion’ to the greatest loss that could conceivably have followed from the breach.

He argued that the fact that the amount payable under the clause was greater than the sum which might actually be awarded as damages for breach was insufficient to show that it amounted to a penalty.[29] Instead the Court was required to make a mathematical comparison between the amount specified in the clause and the actual loss likely to be suffered as a result of the breach. The clause would only create a penalty if there was a substantial disproportion between those amounts.
[29]AMEV (1968) 162 CLR 170, 190, and cited with approval in Esanda Finance Corporation Limited v Plessnig (1989) 166 CLR 131.

Counsel for Allforks accepted that the question whether a clause created a penalty was to be resolved at the time the contract was made, rather than when it was breached. However, he said that it was appropriate for her Honour to take account of Allforks’ corporate financing arrangements, in deciding whether the amount required to be paid under cl 14.1 was extravagant or unconscionable under the Dunlop[30] principle. It was not necessary for PRE to be aware of these circumstances at the time the contract was made.
[30]Dunlop [1915] AC 79, 86-7.

Counsel for Allforks pointed out that in Ringrow, the High Court took account of evidence that at the time of breach, the service station which BP was entitled to re-purchase did not have any associated goodwill. In those circumstances counsel submitted that ‘[w]hile conventionally the calculation of extravagance is judged at the time of the making of the contract it is not a strict rule of evidence …’.

Thus, in deciding whether the clause was a genuine pre-estimate of loss or required payment of an extravagant and unconscionable amount, her Honour was entitled to take account of the fact that:

Forklifts have a five year life due to heavy work and are depreciated at 15 [percent] per annum. If the Respondent terminates its finance of the forklifts it pays interest and penalties to its bank. It purchases forklifts when it has a hire order. The total purchase price of the forklifts including ‘build costs’ or mechanical preparation was $94,606 with residual payments to the ANZ [of] $65,606. While just under $30,000 had been earned in income on the equipment servicing, expenses were $11,746 and the earnings should have been $40,843 had the agreements been fulfilled. The repossessed forklifts would arguably have generated no future income due to a surplus of equipment.[31]

[31]Ibid [13] (citations omitted).

Counsel submitted that the fact that Allforks was itself required to continue to make payments to the ANZ bank for the duration of the length of the term, under its corporate financing arrangements, distinguished this case from O'Dea and AMEV, where ownership of the equipment in question was not subject to a sub-finance agreement.

Counsel submitted that Ringrow represented a return to the principles laid down in Dunlop. In Ringrow the High Court had not suggested that a different approach should be taken, depending on whether a case involved a lease, hire purchase or other arrangement. Instead, the court should consider whether a clause created a penalty by reference to the terms of the agreement and the circumstances existing when it was made.

I now consider the three issues arising from the grounds of appeal and counsel’s submissions. These are:

·the applicable test in deciding whether a provision for payment of a monetary sum is a penalty;
·whether her Honour erred in applying the relevant test; and
·whether the provision for payment of the whole of the rent, if the agreement was terminated for breach, was a penalty.

What test applies in deciding whether clause 14.1 was a penalty?

As both counsel accepted, Lord Dunedin’s statement in Dunlop[32] is the starting point for deciding whether a clause requiring payment of a monetary sum, if specified events occur, is a penalty. Lord Dunedin said that:
[32][1915] AC 79.

1.Though the parties to a contract who use the words ‘penalty’ or ‘liquidated damages’ may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found … in nearly every case.
2.The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage …
3.The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach …
4.To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:
(a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach …
…
(c)There is a presumption (but no more) that it is penalty when ‘a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage’ …

On the other hand:
(d)It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties …[33]

[33]Ibid 86-8 (citations omitted).

Academic commentator Dr Chris Rossiter argues that the central requirement to be derived from Dunlop is that there be a genuine pre-estimate of damages and that:

To aid in this decision making process, Lord Dunedin postulated several tests, but these tests were clearly proffered as subsidiary to the central issue of whether or not there was a genuine pre-estimate.[34]

[34]C J Rossiter, Penalties and Forfeiture (1992), 32 (citations omitted).

These principles have been considered and applied in numerous cases.

In O'Dea[35] the lessees/appellants leased a truck from the lessor/respondent, under an agreement which provided that the entire rental payment of approximately $39,000 was due on the signing of the agreement, but that if the lessee complied with the covenants and punctually paid specified monthly instalments, the lessor would not demand payment of the whole amount otherwise than by those instalments. The agreement stated that it was not intended to be a hire purchase agreement and the lessee had no right under the agreement to purchase the truck.[36]
[35](1983) 152 CLR 359.
[36]See ibid 364 (Gibbs CJ).

Clause 12 of the agreement provided that if the lessee defaulted in the punctual payment of any of the instalments or of insurance premiums, or in the performance of other terms and conditions, the lessor could repossess the vehicle and the lessee^'s right to use the vehicle would be terminated. Thereafter all moneys due for the unexpired term, plus reasonable costs of repossession, would immediately become due and payable.

The clause did not provide any rebate in respect of the acceleration of the payment of future rent and did not require the lessor to account to the lessees for any amount received by it if the truck was resold. The clause applied regardless of whether the particular breach of covenant giving rise to the right to terminate the lease caused significant or trifling damage.

After the lessees defaulted in the payment of rent, the lessor repossessed and sold the truck and sought to recover the difference between the total rent payable under the agreement and the instalments which had been paid, as well as interest and an amount paid to discharge a lien to retake possession of the truck. One of the submissions made on behalf of the lessor was that clause 12 was not a penalty, because it simply provided for acceleration of the pre-existing obligation to pay the debt of $39,000 which was due at the beginning of the term.[37] (That issue does not arise on this appeal.)
[37]As in Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltd (1906) 4 CLR 672.

The High Court held that the question whether a clause created a penalty was one of substance, rather than form. Accordingly the fact that the lease required payment of the full amount of rent at the beginning of the term, and then granted an indulgence permitting that amount to be paid in regular instalments, did not alter the penal character of clause 12. Gibbs CJ said that:

Of course, a lessor is entitled to be compensated for the loss which he is likely to suffer on the premature termination of a hiring. However, the outstanding balance of the entire rental could not in the circumstances possibly represent a genuine pre-estimate of the loss which would be caused to the first respondent by a breach of the contract. In the event of a breach the first respondent was entitled to repossess and resell the vehicle, but it was not bound to account to the lessee for any amount received on a resale, even if it exceeded (as it did) the appraisal value. The first respondent became entitled under the contract to receive the accelerated payments of the rental without any rebate and to receive back the vehicle sooner than would otherwise have been the case without giving credit for its value and in these circumstances the amount receivable by the first respondent was manifestly excessive in comparison with the greatest loss that it could possibly suffer as a result of the default in payment of the instalments. Moreover, the entitlement of the first respondent arose on a number of events, including any default in performance of the terms and conditions of the contract, some of which, by their nature, could lead only to trifling damage.[38]

[38](1982) 152 CLR 359, 369.

Wilson J noted that no discount was allowed under clause 12 for the early receipt of rental payments and that the lessor was not required to attempt to lease the vehicle for the unexpired term in order to mitigate the loss otherwise accruing to the lessee in the event of default. He said that:

Bearing in mind that the possible defaults that may activate the powers of the lessor under cl. 12 encompass both trivial and serious breaches without distinction in the remedy and that the clause may operate at any time during the currency of the lease with no provision for rebate of future instalments or for crediting the lessee with any capital gain represented by the amount by which the value of the vehicle on repossession exceeds its appraisal value, it is in my opinion quite impossible to conclude that the clause reflects on the part of the parties a genuine pre-estimate of damage. It is a penalty against which the lessee is entitled to relief.[39]

[39]Ibid 383.

Brennan J said that the mere fact that clause 12 imposed an obligation to pay the whole of the rental did not make it a penal clause. However, the fact that the lessor had a right under clause 12 to repossess the vehicle in the event of default and to recover both the moneys due for the unexpired term and possession of the vehicle, ‘so that the lessor becomes entitled to more than it would be entitled to if no default occurs’,[40] made it a penal clause. He said:

Although a stipulation as to the price payable for the sale of hiring of goods is not itself in the nature of a penalty, a stipulation which provides for the forfeiture on breach by the buyer or hirer of both the price and the consideration for which it is payable is in the nature of a penalty and equity will relieve against it.[41]

[40]Ibid 390.

[41]Ibid 391.

Deane J held that the clause created a penalty because it required payment of a sum which was ‘extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach’.[42] He said that:

In that regard, a pre-estimate of damages will not, for the purposes of determining whether a stipulated sum is a penalty, be regarded as ‘genuine’ if it be unreasonable …[43]

[42]Ibid 399-400.

[43]Ibid.

In his view the provision was a penalty because:

There is nothing at all in the contract to suggest that those provisions represent a genuine or a reasonable pre-estimate of damages which Allstates would sustain in the event of breach by the lessees. They are applicable on the occurrence of any default in the punctual payment of an instalment of rent or of an insurance premium or in the performance of any one of a large number of terms and conditions ranging from the trivial to the serious. They could result in an unreasonable windfall to Allstates and an unconscionable burden upon the lessees in the event of breach of the most trivial condition. Thus, if breach occurred immediately after the commencement of the agreement, Allstates would be entitled to retake possession of the prime mover and to recover, pursuant to cl. 12, the amount necessary to bring its total receipts from the lessees to $39,550.32 for a hiring period that might be measured in hours or days.[44]

[44]Ibid 400.

Murphy J also held that the clause created a penalty because it did not provide for rebate of future rental payments if the vehicle was repossessed, or provide an allowance for surplus if it was resold above its appraisal value. The clause was therefore ‘unconscionably harsh’.[45]
[45]Ibid 375.

In AMEV,[46] AMEV, the appellant finance company, leased printing equipment to Lithotone. The lease provided that the full amount of the rent was payable on execution of the agreement, but that if rental payments were made in specified instalments, AMEV would accept the total rent in instalments. Lithotone fell behind in its rental payments, but did not repudiate the contract. The respondents guaranteed the punctual payment of all rental monies owed by Lithotone to AMEV. Following late payment of the rent, AMEV exercised its right to terminate the lease, repossessed the printing equipment and sued the respondents for (among other things) rental arrears, future rent owing and any loss made on the sale of the equipment.
[46](1986) 162 CLR 170.

The sole issue in the case was whether AMEV was entitled to recover damages which included the present value of future hire charges, when it had voluntarily exercised its right to terminate the lease following a non-repudiatory breach by the lessor.[47] It was conceded by AMEV that, on the basis of O^'Dea, the clause in the lease under which the hirer agreed to pay the full balance of the hire charges if the lessee failed to pay any rental instalment within seven days of it becoming due, was a penalty. The lease also provided that if AMEV disposed of the goods and the net proceeds of the sale were less than the residual value in the schedule, Lithotone was required to meet that deficiency. Gibbs CJ said that the concession that the provision for payment of these amounts was a penalty was clearly correct, on the authority of O’Dea.[48]
[47]Ibid 174-5 (Gibbs CJ).
[48]Ibid 174.

Similarly, Mason and Wilson JJ in their joint judgment said that the trial judge had correctly regarded the decision of the High Court in O’Dea as authority:

… for the proposition that, where a lessee is under no present obligation to pay the entire rent, a provision requiring him to pay the whole of the balance of the rent for the unexpired term, without rebate for accelerated payment of future instalments, on his breach of the agreement in failing to make prompt payment of an instalment of rent, is a penalty if in the circumstances the lessor is entitled to repossess and resell the goods leased and is not bound to account to the lessee for the proceeds of sale, even if they exceed the appraisal or residual value. The point is that such a provision cannot amount to a genuine pre-estimate of damage because it must necessarily exceed by a wide margin the greatest loss which the lessor can suffer as a result of default in payment of instalments. The lessor would receive both the entire rental and possession of the vehicle, which would greatly exceed his damage …[49]

[49]Ibid 180-1.

Their Honours noted that the terms of the agreement were indistinguishable from the provision held to be a penalty in O’Dea and that the drafter of the agreement had not attempted to take advantage of the High Court decision in IAC (Leasing) Ltd v Humphrey.[50] Their Honours said that in that case,[51] Walsh J had indicated that:

… if provision is made for an appropriate rebate of future instalments of rent and for the lessee to have the benefit of any excess of the net sale price over the residual value, so long as it is the subject of a bona fide estimate … [52]

the clause would not impose a penalty.

[50](1972) 126 CLR 131.

[51]Ibid 141-5.

[52](1986) 162 CLR 170, 181.

Deane J dissented in the result. However, like the majority of the High Court, he accepted that the relevant clause was a penalty. He said that in deciding whether a clause providing for the lessee’s payment of a sum on termination was to be categorized as a genuine pre-estimate of loss or a penalty, the relevant loss was not limited to the loss ‘flowing immediately and merely from the actual breach of contract’ but could include the loss of benefit of the contract resulting from its premature termination.[53] Dawson J, the other dissentient, also said that in considering whether provision for payment of a stipulated sum was a penalty, loss of bargain damages could be taken into account and that:

This loss may well extend to the loss of the balance of the entire rental, provided there is an appropriate rebate for early recovery and allowance is made for the proceeds of the goods repossessed to the extent that they exceed the residual value specified.[54]

[53]Ibid 197.

[54]Ibid 210.

As I have said, O^'Dea was accepted as correct in AMEV. However, Mason and Wilson JJ’s remarks in the latter case indicate that a clause will not be held to be a penalty, simply because the sum to be paid on termination of an agreement is greater than the damages that might be awarded for breach of contract. Referring to earlier decisions[55] which had taken that approach, their Honours commented that they were:
[55]Cooden Engineering Co Ltd v Stanford [1953] 1 QB 86, 98.

… more consistent with an underlying policy of restricting the parties, in case of breach of contract, to the recovery of an amount of damages no greater than that for which the law provides. However, there is much to be said for the view that the courts should return to the [Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda[56]] and Dunlop concept, thereby allowing parties to a contract greater latitude in determining what their rights and liabilities will be, so that an agreed sum is only characterised as a penalty if it is out of all proportion to damage likely to be suffered as a result of breach: see Robophone Facilities Ltd v Blank[57] …[58]

They also observed that:
Penalty clauses are not, generally speaking, so expressed as to entitle the plaintiff to recover his actual loss. Instead they prescribe the payment of a sum which is exorbitant or a sum to be ascertained by reference to a formula which is not an acceptable pre-estimate of damage.
…
The test to be applied in drawing the distinction [between liquidated damages and a penalty] is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff’s conduct in seeking to enforce the term.[59]

[56][1905] AC 6, 10-11, 17.

[57][1966] 1 WLR 1428, 1447-8.

[58](1986) 162 CLR 170, 190.

[59]Ibid 193.

The test proposed by Mason and Wilson JJ was that a contractual provision for the payment of a stipulated sum is only a penalty if it is ‘extravagant and unconscionable’ or ‘out of all proportion’ to the damages suffered. In Esanda Finance Corporation Limited v Plessnig[60] the High Court applied that test to a clause in a hire-purchase agreement relating to the hire of a truck, and held that a clause providing a formula for calculation of damages in the event of a default in payment of instalments was not a penalty.
[60](1989) 166 CLR 131.

The agreement provided that if the lessee made any default in payment the owner could retake the goods and the hiring would terminate. In those circumstances the owner would be entitled to recover an amount equal to the whole of the rent payable under the agreement, less the deposit, any rentals paid, the value of the goods (being the best wholesale price reasonably obtainable for them at the time of possession) and a rebate calculated in accordance with a formula.

Wilson and Toohey JJ made specific reference to Deane J’s statement in AMEV, which indicated that a genuine pre-estimate of damages could include damages for loss of bargain and was not confined to the loss flowing immediately from the actual breach of contract.[61] Counsel for the Plessnigs (ie the lessees) submitted that the clause was a penalty because it did not provide for a refund to the lessees of any excess if the truck was repossessed and sold at a profit to the lessors. Their Honours rejected the conclusion that ‘the mere possibility of unfairness lurking in the formula … is sufficient to characterize the [provision] as a penalty‘.[62] They said:

The adoption of such a criterion fails to allow for the latitude that necessarily attends the conception of a genuine pre-estimate of damage. The clause is to be construed from the point of view of the parties at the time of entering into the transaction. The character of a clause as penal or compensatory is then to be perceived as a matter of degree depending on all the circumstances, including the nature of the subject-matter of the agreement. The vehicle in the present case was a secondhand prime mover, such that the appellant would not grant to the respondents the requested term of four years and therefore limited the term of the hiring to a period of three years. The possibility that in the event of a termination upon default the moneys paid by the respondents, together with the value of the vehicle on repossession (less costs of repossession), would exceed the total rent appropriately rebated would seem to us to be unlikely. If the hiring were terminated early in the term the payments of rent would be likely to be matched by the diminution in value of the vehicle engaged in heavy haulage in the transport industry. It could only happen, if at all, later in the term when a substantial amount of rent had been paid and the vehicle retained a saleable value of some significance. The mere possibility in these circumstances of an excess is not sufficient, in our opinion, to render cl 6 unenforceable as a penalty.[63]

[61]Ibid 140. Brennan J at 147 also accepted this view, whilst noting the difficulties of applying this principle where the contract is terminated for a non-repudiatory breach.

[62]Ibid 142.

[63]Ibid 142.

Brennan J also applied the Dunlop approach. He held that the stipulated sum was a genuine pre-estimate of loss and not a penalty because the formula prevented the lessor from recovering future rent or costs of repossession and sale, unless the value of the repossessed goods was insufficient to meet the net losses of the lessor:

Where the formula produces no debit balance, the contract imposes no liability on the hirer: no penalty is imposed.[64]

[64]Ibid 149.

In his view, neither the provision allowing credit for the wholesale (rather than the retail) value of the goods, nor the absence of a requirement that the

lessor account for any profit made on sale of the goods, was inconsistent with the clause being a genuine pre-estimate of damages.[65]

[65]His Honour discussed the difference between the approach to be applied where the contract is, in substance, a money lending transaction, and the hirer is a finance company, and the situation where there is a hiring contract conferring an option to purchase. It is unnecessary to discuss those issues here.

Deane J remarked that, apart from these two matters, it was difficult to see how the clause could amount to a penalty because:

… the formula for calculating the recoverable amount represents … an obviously fair method of estimating in advance the owner's likely damages including loss of bargain: it rebates future rental charges by, in effect, reducing them to present value and it provides for a deduction of the present value of the repossessed goods.[66]

Accordingly the clause was a genuine pre-estimate of loss and not a penalty.

[66]Ibid 154.

The out of all proportion test has been applied in a number of subsequent cases. In AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Ltd[67] Kirby P (as he then was) said that although it was unnecessary to decide which test should be applied to decide whether an alleged pre-estimate of damages was a penalty, he was inclined to follow the ‘more stringent test^’ stated by Deane J in O'Dea. This was because emphasis on the question whether the amount required to be paid was ‘extravagant or unconscionable’:

… tends to uphold the right of the parties to agree as they think fit. It retains to the courts a suitable means of providing relief in appropriate cases. It promotes, in suitable matters, non-litigious solutions to disputes, the possibility of which is anticipated. It avoids questions about the authority of the courts to interfere in the contractual freedom of parties, save where that freedom is judged to be spurious or to have led to a result which would be unconscionable.[68]

[67](1989) 15 NSWLR 564 (‘Artes Studios’).

[68]Ibid 566.

Clarke JA cited Deane J's comments in O'Dea and approached the question whether the relevant clause was a penalty:

… upon the basis that there was an onus upon the respondent to satisfy the court that there was such a disproportion between the sum payable on termination, calculated in accordance with the terms of the contract, and the likely damage flowing to the appellant upon termination that it should be concluded that the pre-estimate was either extravagant or unconscionable.[69]

[69]Ibid 578. See also ibid 574.

His Honour agreed with Deane and Dawson JJ in AMEV that in deciding whether a stipulated sum is a genuine pre-estimate of damages, loss of bargain damages should be taken into account.[70] He was critical of the view expressed in some authorities that if a contract provides for termination in the event of a trivial or serious breach this necessarily indicates that a clause providing for payment of an agreed sum on termination is a penalty.[71] He considered that it was only if there was a significant disproportion between the sum agreed to be paid and a genuine pre-estimate of damages that the sum should be held to be a penalty.[72] He said that ‘[i]f the sum payable on termination [was] considered a reasonable pre-estimate of the loss flowing from the early termination then it will not be struck down as a penalty notwithstanding that the right may be exercised upon the occurrence of a trivial breach of contract’.[73]
[70]Ibid 574.
[71]Ibid 574.
[72]Clarke JA said that he had expressed a contrary view at first instance in Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1, but now considered that he was wrong in holding that a clause was a penalty if it provided for payment in the event of termination resulting from the innocent party’s election to terminate the contract.
[73]Ibid 575.

ArtesStudios concerned lease agreements providing for the lease of race-horses which stipulated that if there was any default in payment of rent on the due date, the total rent would become payable. A similar provision was made in relation to other breaches. The leases set out a formula for calculation of a rebate payable to the lessee in certain situations. The provision was interpreted by the trial judge as meaning that no rebate was payable unless the lessee returned all of the horses to the lessor or paid their residual value as set out in the lease to the lessor.

The New South Wales Court of Appeal held that whichever test was applied to determine whether the clause was a penalty, the provision was void. This was because if the lease was terminated in its early stages and only some of the horses were returned, the lessor would be entitled to sue for the residual value of the horses set out in the leases and the total outstanding rent. This would result in an unjustifiable windfall to the lessor.[74]
[74]Ibid 579-80.

In the High Court the out of all proportion test was most recently applied in Ringrow.[75] In that case the purchaser of a service station site from BP entered into an agreement to operate the site under the BP brand. If the operator breached the agreement, BP could terminate the agreement and sue for liquidated damages. Under a separate deed, BP was given the option to re-purchase the service station site if the exclusive distribution agreement was terminated. After the agreement was breached, BP exercised its right to terminate it and sought to exercise its option to purchase. Ringrow claimed that it was an unenforceable penalty. One of the submissions made in support of that claim was that the option clause permitted BP to purchase the service station at market value, but excluded goodwill.[76]
[75](2005) 224 CLR 656.
[76]It was also submitted (1) that BP had a right to liquidated damages under the contract and that if it exercised the option it would be securing a double remedy for the same breach and (2) that the right to exercise the option was unrelated to the gravity of the breach: ibid 665.

Their Honours began by referring to Lord Dunedin’s statement in Dunlop. They said that:

... the present appeal afforded no occasion for a general reconsideration of Lord Dunedin’s tests to determine whether any particular feature of Australian conditions, any change in the nature of penalties or any element in the contemporary market-place suggest the need for a new formulation. It is therefore proper to proceed on the basis that Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd continues to express the law applicable in this country, leaving any more substantial reconsideration than that advanced, to a future case where reconsideration or reformulation is in issue.[77]

[77]Ibid 663 (citations omitted).

Their Honours held that the clause was not a penalty. They referred favourably to the comments of Mason and Wilson JJ in AMEV,[78] emphasising the desirability of permitting parties to negotiate the consequences of a contractual breach. They said that:

The principles of law relating to penalties require only that the money stipulated to be paid on breach or the property stipulated to be transferred on breach will produce for the payee or transferee advantages significantly greater than the advantages that would flow from a genuine pre-estimate of damage. Among the different words which have been used to describe how extensive the difference must be before the transaction creates a penalty are the words employed by Mason and Wilson JJ in AMEV-UDC Finance Ltd v Austin – ‘a degree of disproportion’ sufficient to point to oppressiveness.[79]

[78](1986) 162 CLR 170, 193.

[79](2005) 224 CLR 656, 667 (citations omitted).

Their Honours said that if Ringrow had paid BP for goodwill when it bought the service station from BP, but was not to be paid for retransferring it on exercise of the option, ‘a suspicion would arise that what was retransferred might be worth more than the price to be paid for it’.[80] However:

… a mere difference is not enough, let alone a suspicion of a difference. The comparison calls for something ‘extravagant and unconscionable’ in the value of what is transferred compared to the price to be received, to use Lord Dunedin’s words. It calls for a ‘degree of disproportion’ sufficient to point to oppressiveness, to use the words of Mason and Wilson JJ.[81]

[80]Ibid 666.

[81]Ibid 666 (citations omitted).

At the trial an expert gave evidence that there was no significant goodwill associated with the service station. On that basis their Honours said that ‘even if the appellant is right in contending that in 1999 it paid for goodwill and when the retransfer takes place it will receive nothing for goodwill, it is not possible to say what, if any, money sum it has lost’.[82]
[82]Ibid 666.

Since the decision in Ringrow, the out of all proportion test has been applied by intermediate appellate courts, on a number of occasions. In YarraCapital Group Pty Ltd v Sklash,[83] this Court considered whether a clause in a short term loan agreement between two money lenders was in the nature of a penalty, or a provision for payment of liquidated damages. The loans were unsecured and provided for payment of default interest at a very high rate, if repayments were not made on time. Chernov JA referred to the comments of Mason and Wilson JJ in AMEV. He said that the parties to the agreement were operating in a short term money market where the cost of borrowing was very high and ‘it would be a complex and expensive exercise to seek to establish, with any sort of precision, what damage is likely to flow from a failure by the appellants to repay the principal on the due date’.[84] In those circumstances he was not satisfied that the default clause was so out of proportion with the loss likely to flow from the breach that it was a penalty.
[83][2006] VSCA 109 (‘Sklash’). This was an appeal against a decision of a trial judge dismissing an appeal against a summary judgment decision made by a Master.
[84]Ibid [17].

Warren CJ agreed with Chernov JA, commenting only that the contract was made between parties of commercial acumen and experience. Ashley JA, disagreed in the result, but also appears to have accepted that the out of all proportion test should be applied.[85]
[85]Ibid [44]-[47]. Ashley JA considered that the appellant should be given leave to defend. He would have left it open to be resolved at the trial whether unconscionability and disproportionality were to be regarded as separate bases for holding that a clause was a penalty.

In Interstar[86] the New South Wales Court of Appeal also applied the out of all proportion test.[87] Allsop P said:

It can be taken as clear from Ringrow, DunlopPneumatic and Mason and Wilson JJ in AMEV-UDC that what might be called the ‘weaker test’ in CoodenEngineering[88] and in WT Malouf Pty Ltd v Brinds Ltd[89] is not the law. This was a view reached unanimously by this Court in Artes Studios …[90]

[86](2008) 257 ALR 292.

[87]It appears from the transcript of the special leave application hearing that the test is not subject of the appeal: Integral Home Loans Pty Ltd v Interstar Wholesale Finance Pty Ltd [2009] HCA Trans 87.

[88]Cooden Engineering Co Ld v Stanford [1953] 1 QB 86.

[89](1980) 52 FLR 442, 462 (Samuels JA with whom Hope JA agreed).

[90](2008) 257 ALR 292, 333.

As I have said, counsel for Mr Zachariadis submitted that her Honour had wrongly taken the view that Ringrow introduced a new approach[91] to the law of penalties. In support of that submission he relied on an article by academic commentators Peden and Carter which differentiated between Ringrow, which concerned a clause requiring an option to purchase property, and chattel hire cases such as O’Dea. Peden and Carter argued that ‘[Ringrow] should not be taken to decide that where the parties agree a figure which is not accurate, or clearly wrong, the clause will be upheld so long as the inaccuracy or error does not result in an amount which is “out of all proportion”’.[92]
[91]Or rather a return to the Dunlop approach.
[92]Elisabeth Peden and John W Carter, ‘Agreed Damages Clauses – Back to the Future?’ (2006) 22(2) Journal of Contract Law 189, 196.

Peden and Carter argue that there is a difference between situations where accurate pre-estimation of loss is possible and situations where damages are difficult to assess, or at least not subject to an obvious formula. In their view, the out of all proportion test applied in Ringrow is, prima facie, not applicable where accurate pre-estimation of loss is possible.[93] They argue that:

The feature which is common to the cases in which substantial accuracy has been applied to strike down agreed damages clauses as penalties is that pre-estimation of damages is a relatively straightforward process. There is a well-established measure of loss of which parties to commercial transactions must be taken to be aware.[94]

[93]Ibid 197.

[94]Ibid 196.

On the basis of the authorities discussed above,[95] I do not accept counsel for Mr Zachariadis’ submission that the out of all proportion test was inapplicable and that her Honour wrongly treated it as the test to differentiate between a genuine pre-estimate of damages and a penalty.
[95]The out of all proportion test has also been applied in a number of other recent decisions: see for example Joelco Pty Ltd v Balanced Securities Ltd [2009] QSC 236; Fermiscan v James (2009) 81 IPR 602; Bay Bon Investments Pty Ltd v Selvarajah [2008] NSWSC 1251; South Australian Farmers Fuels Pty Ltd v Whittingham [2008] SASC 211; Harrison Ford Pty Ltd v Ford Motor Company of Australia Ltd [2008] VSC 235; GT Corporation Pty Ltd v Amare Safety Pty Ltd [2008] VSC 143.

Nevertheless Peden and Carter’s article suggests that the factual circumstances in which the contract is made will affect the application of that test. In Ringrow, the High Court itself acknowledged that a clause requiring the transfer of property on breach of a contractual term requires:

… a different approach from that employed in typical penalty cases. In typical penalty cases, the court compares what would be recoverable as unliquidated damages with the sum of money stipulated as payable on breach. In cases like the present … assuming … that the doctrine of penalties is capable of application at all, one relevant comparison would be between the price payable by the respondent to the appellant on retransfer of BP Lansvale by the appellant, and the actual value of what is transferred.[96]

[96](2005) 224 CLR 656, 665.

I now turn to the question whether her Honour’s conclusion that clause 14.1 was not a penalty was based on an inaccurate application of the out of all proportion test.

Did her Honour apply the test correctly?

Counsel for Allforks submitted that the clause was not a penalty because the forklift bodies were purchased by Allforks and were then built up to PRE’s specifications. In these circumstances if the hire agreements were terminated, Allforks would have had difficulty in hiring them to another customer and accordingly, clause 14.1 reflected the loss that it might suffer in those circumstances.

Allforks’ notice of contention also raises the question whether her Honour should have considered Allforks’ corporate finance arrangements, when deciding whether clause 14.1 was a genuine pre-estimate of damages. Counsel for Allforks contended that clause 14.1 was a genuine pre-estimate of loss, because if the hire agreements with PRE were terminated for breach, Allforks would remain liable to pay interest to the ANZ bank in relation to its own hire of those forklifts.

In response to a question from the presiding judge, counsel for Mr Zachariadis submitted that Allforks’ corporate financing arrangements with the ANZ bank could not be taken into account in deciding whether clause 14.1 was a genuine pre-estimate of damages, unless PRE was aware of those arrangements when it entered into the hire agreements. Moreover, the evidence was that the relevant forklifts were not sold to the ANZ bank and re-hired to Allforks until after Allforks entered into the hire agreements with PRE.[97]
[97]Forklift nos 494 and 556 were hired by the ANZ Bank to Allforks on 26 April 2006 and forklift nos 346 and 461 were hired on 24 July 2006. Allforks and PRE entered into their hire agreements on 24 January 2006.

For the reasons given below it is unnecessary to decide whether PRE’s knowledge of Allforks’ arrangements with the ANZ bank, or its lack of knowledge, is relevant in determining whether clause 14.1 is a penalty or a genuine pre-estimate of damages. Reasoning from first principles however, it appears that if the particular loss caused to Allforks would have been recoverable as damages for breach of contract under Hadley v Baxendale,[98] it would be open to it to stipulate a sum payable to cover that loss, whether or not PRE was aware of the particular circumstances giving rise to that loss.[99] In this case the forklifts were built up to satisfy PRE’s specifications. It must therefore have been reasonably foreseeable that there could be difficulties in hiring them to another customer if they were returned and that if another lessee was found that lessee might only pay a lower rent. A clause which provided a formula to calculate that loss would not be a penalty.
[98](1854) 9 Exch 341, 354 and see the discussion in Seddon and Ellinghaus, above n 13, 1011-1014.
[99]For a useful discussion on this matter see Rossiter, above n 34, 27-44.

There is no evidence as to whether PRE knew of Allforks’ financing arrangements with the ANZ bank. In these circumstances it is doubtful whether that loss would have been recoverable under the principle in Hadley v Baxendale.[100] However, if clause 14.1 had set out a formula based on the costs that Allforks would incur under their hire purchase arrangements with the ANZ bank, with provision for offsetting any gains Allforks might make as a result of the early termination of the hire agreements with PRE, I consider that such a clause would be a genuine pre-estimate of damages rather than a penalty.
[100](1854) 9 Exch 341.

The requirement to consider whether the clause is a penalty at the time when the contract was made, does not preclude the court from taking account of the possible financial consequences of a future breach for the innocent party, in deciding whether the clause is a genuine pre-estimate of the damages likely to be suffered.

Her Honour correctly stated that principle, but she did not apply it correctly. Her Honour did not ask herself whether clause 14.1 was a genuine pre-estimate of damages at the time the agreements were made, because at that time, Allforks had financed its operations by selling equipment to the ANZ bank and then repurchased it under hire purchase agreements. Instead, her Honour compared the amount that Allforks would have to pay ANZ under its corporate finance facility with the market and book value of the forklifts returned to it when the hire agreements were terminated. She said that because there would be no net gain to Allforks on the basis of the market value of the forklifts and only a small gain if the book value was considered, the clause did not create a penalty.

In making that comparison, her Honour went beyond considering the effect of clause 14.1, judged as at the time of the making of the agreements. The Dunlop test required her Honour to determine whether the amount payable under clause 14.1 (that is rental for the whole of the hire period with no offsetting provision) was out of all proportion with the loss which Allforks was likely to suffer.

Peden and Carter comment that:

… it must be generally inappropriate to look at the difference between the actual loss and the amount determined under the formula and to conclude whether the formula provides for a penalty by reference to whether the difference is small or great. Instead, the question is whether, at the time it was agreed, it could be seen that application of the formula would produce an amount which would be out of all proportion to the loss of damage likely to be suffered.[101]

[101]Peden and Carter, above n 92, 197.

It must be acknowledged that in Ringrow the High Court did not compare the value of the option with the loss or damage likely to be suffered by BP, but instead compared the actual loss and the amount determined under the formula. That difference in approach can, perhaps, be explained by the fact that the High Court itself said that a provision conferring an option to purchase property required ‘a different approach from that applied in typical penalty cases’.[102] Alternatively, the High Court may have regarded the valuation of the goodwill as casting light on the circumstances existing at the time of the contract, as counsel for Allforks suggested. In this case however, it cannot be assumed that Mr Mountjoy’s evidence as to the actual financial consequences of the early return of the forklifts had any relationship with a genuine pre-estimate of damages made at the time when the parties entered into the contract.[103]
[102](2005) 224 CLR 656, 665.
[103]See paragraph [82] above.

Was clause 14.1 a penalty?

In my opinion the requirement that PRE pay all charges which would have otherwise been payable from the date of termination until the expiry date, was, in the circumstances of this case, a penalty. In reaching that conclusion I have taken account of the following matters.

First, clause 14.1 has the same characteristics as the provision held to create a penalty in O'Dea. It did not provide a means of calculating the net loss Allforks would suffer if the hire agreement was terminated early. O'Dea was not overruled in either Ringrow or AMEV and remains good law in Australia.

Secondly, in Sklash, the difficulties which arose in establishing the quantum of any loss suffered as a result of breach were regarded as a relevant factor in determining whether the clause was a genuine pre-estimate of loss or a penalty. In this case, unlike the situation in Sklash, the parties to the hire agreement would have had no difficulty in drafting a clause which provided a formula for a pre-estimation of the loss likely to be suffered by Allforks if the agreement was prematurely terminated. Such a clause is set out in Rossiter's book Penalties and Forfeiture.[104]
[104]Rossiter, above n 34, 88. Although this work preceded Ringrow, the suggested clause would appear to be appropriate.

Thirdly, the requirement to pay all future hire charges under clause 14.1

applied in the event of ‘any breach’ which gave rise to the right to terminate the agreement. Many of the breaches which could occur would produce little or no loss. Examples include breaches of the term to ‘… check daily the general condition of the Equipment …’, ‘… [to pay] Hire Charges … at the times and place specified in the Schedule^’ or to ‘notify Allforks Australia within 24 hours of any event occurring which may give rise to [an insurance] claim’. If PRE breached any of these terms and, as a consequence, Allforks exercised its right to terminate the lease, PRE would be liable to pay the whole of the outstanding rent. The lack of any relationship between the breach and the amount payable under clause 14.1 indicates that the clause was not a genuine pre-estimate of loss.

In my opinion therefore her Honour should have held that the clause was a penalty because it was not a genuine pre-estimate of loss of damages, having regard to the circumstances existing when the agreements were made. Her Honour wrongly applied the out of all proportion test by reference to the circumstances existing at the time of the breach, rather than at the time when the agreements were made. For these reasons, ground of appeal 5 is made out. Accordingly it is unnecessary to consider paragraph 7 of Allforks’ notice of contention. For these reasons I would allow the appeal and set aside the judgment in favour of the respondent.

KYROU AJA

I would also allow the appeal, set aside the judgment in favour of the respondent and enter judgment in favour of the appellant.

I agree with Neave JA that grounds of appeals 1 to 4 are not made out for the reasons her Honour has given. In relation to ground of appeal 5, I agree that clause 14.1 is a penalty for the reason given by Neave JA in [156] of her judgment.

---

[2009] VSCA 258

13 November 2009